Business context and reporting period
Casual Male Retail Group, Inc. (now identified in the request as Destination XL Group, Inc.) filed this Form 10-K on March 16, 2012. The filing covers fiscal 2011, a 52-week year ended January 28, 2012—not 2010 Q4. The company was a specialty retailer of big-and-tall men’s apparel, operating Casual MaleXL, DestinationXL (DXL), Rochester Clothing, outlet stores, catalogs and e-commerce businesses. At year-end it reported 450 stores, including 16 DXL stores.
Financial results and liquidity
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Sales | $397.7 million | $393.6 million |
| Comparable sales growth | 2.1% | 1.5% |
| Gross profit margin, including occupancy costs | 46.2% | 45.8% |
| Operating income (loss), GAAP | $(6.6) million | $16.2 million |
| Operating income before trademark impairment (non-GAAP) | $16.5 million | $16.2 million |
| Net income | $42.7 million | $15.4 million |
| Diluted EPS | $0.89 | $0.32 |
| Cash from operations | $23.4 million | $19.0 million |
| Capital expenditures | $18.0 million | $9.0 million |
| Free cash flow (non-GAAP) | $5.4 million | $10.0 million |
- Fiscal 2011 gross margin improved 40 basis points year over year; SG&A rose to $154.8 million, or 38.9% of sales.
- Year-end cash was $10.4 million; working capital was $78.5 million and the current ratio was 2.4:1. Inventory increased 12.2% to $104.2 million, mainly due to higher costs and in-transit inventory.
- No debt was outstanding at year-end. The company had $65.8 million of unused availability under its $75 million revolving facility, which matures November 2014; letters of credit were outstanding.
- Contractual commitments included $237.9 million of operating lease payments and $60.0 million of merchandise purchase obligations. The pension plan was underfunded by $4.8 million.
Material changes versus the prior comparable period
- Sales increased 1.0% and comparable sales increased 2.1%, but management said results were below expectations. Store traffic declined approximately 3.1% for the year, with weakness in the second half; mild winter weather and promotional competition also weighed on sales.
- Reported net income included a $47.8 million income-tax benefit from reversing substantially all of the U.S. deferred-tax valuation allowance. It also included a non-cash $23.1 million impairment of the Casual Male trademark. Excluding the impairment and the $42.5 million non-recurring tax benefit, adjusted diluted EPS was $0.30, a non-GAAP measure.
- DXL comparable sales rose 12.8% for 14 comparable stores. The company opened 12 DXL stores during the year, while reducing its Casual MaleXL and Rochester store count.
- Operating cash flow improved, but free cash flow declined to $5.4 million as capital spending doubled. Cash rose to $10.4 million, and long-term debt was eliminated.
Guidance, outlook, risks and unusual items
- For fiscal 2012, management forecast sales of $416.5–$423.9 million, comparable-sales growth of 4.7%–6.6%, gross-margin improvement of 60–100 basis points, and diluted EPS of $0.22–$0.27. The lower expected EPS versus adjusted fiscal 2011 reflects a return to a normal tax rate, forecast at approximately 41%.
- Management planned about 35 new DXL stores, approximately 70 store closures, and $35.0 million in capital expenditures. It projected $45.0 million of operating cash flow, approximately $10.0 million of free cash flow, and $20.0 million of year-end cash.
- Management’s longer-term strategy targets 30%–50% revenue growth over five years and more than doubling current operating margins, with DXL expansion central to the plan. It expected 150–175 DXL stores by fiscal 2015 and projected mature-store EBITDA margins of 25%–35%; these are targets and estimates, not guaranteed outcomes.
- The company decided after year-end to discontinue its European direct business, which had posted losses of $2.1 million in fiscal 2011, and expected approximately $1.5 million in termination charges.
- Three California wage-and-hour class actions were identified; the company recorded a $2.3 million charge for estimated obligations and legal fees and believed it had adequately accrued. Other principal risks include weak consumer demand and store traffic, intense competition, fashion and inventory risk, rising input costs, dependence on outside manufacturers and overseas sourcing, and reliance on a centralized distribution and technology infrastructure.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings and EPS reflects the one-time deferred-tax valuation-allowance reversal, and how should the company’s normalized tax rate affect future earnings?
- Whether DXL store sales, mature-store economics and planned openings can offset declining traffic and the planned closure of legacy stores.
- Whether forecast sales, gross-margin gains, cash flow and year-end cash are achieved while capital expenditures rise to $35.0 million.
- The ultimate cash cost and resolution of the California litigation, and the termination costs and savings from exiting European e-commerce.
- Inventory quality and exposure to merchandise commitments, leases, pension underfunding, sourcing disruptions and other obligations.